Zomato’s listing is a watershed moment in the Indian stock market given it makes it the first large pure play listed internet company. The stock has almost doubled from the IPO price. With its success there are many large internet company’s looking to list on the bourses. Likes of Nykaa, Paytm, and Policybazaar have already completed their IPOs. Others like Delhivery have filed their papers for IPO. However, with these businesses being lossmaking, the market is extremely divided. We have seen some market participants comparing this to internet boom of 2000 where the stocks fell significantly. They argue that these companies have no profits to latch onto when the stocks start falling. However, the bullish side believes that like US and China these companies can become the biggest value creators.
Interest in these stocks are to a large extent driven by the success of tech companies in the US and China. Tech heavy Nasdaq went up more than 5 fold in last 10 years. Almost 28% of S&P 500 by value are tech stocks, as a proportion this is just below the earlier highs reached in 1999. These returns are led by FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet (Google)), these five stocks have a combined market cap in excess of $7trillion and contribute almost 20% of S&P500. Hence, a lot of investors are looking at these Indian digital companies and trying to compare it with the US and Chinese companies. In my view India would be a different market and the development of these companies may follow a different path, but the value creation would definitely happen.
Hugely underpenetrated market with high internet uses
India is one of the largest market in the world for ecommerce companies with almost 80 crore internet users. It is estimated that the online shoppers are just around 20% of the internet user. Hence, the market has huge potential to penetrate. By value the penetration is further lower. Other than mobiles and electronics where the penetration could be around 40%, in all other segment online formed less than 10% of the overall markets in 2020. With FMCG & grocery being lowest at sub 1%. Even in food delivery the penetration is sub 10% of the overall restaurant consumption. IF we compare this with US and China the penetration levels are just a small fraction of these markets. This makes people believe that the market potential is significant and hence these companies can keep growing at a very fast pace for multiple years.
Other than ecommerce, Fintech has been another area which is attracting a lot of investor interest. We may see listing of some of the Fintech plays like PayTM and Policybazaar in the near term. This is an area where the opportunities are humongous given the sheer under penetration of financial products in India. Few data points like credit card penetration, insurance penetration and people participating in stock markets all are at sub 5%, this provides a peek into the potential of the Indian market. If we try to compare some of this data some with the developed economies we would again find that India is just a fraction of those markets in penetration (Credit card penetration in China is more than 50% and in US it is more than 300%). Also India could be one of the most technologically advanced markets in Payments given RBI and government actions which should provide Fintechs with pipeline for customer acquisition.
One of the reasons why US has been able to produce these trillion or multi trillion dollar companies is global nature of their business and hence the entire world become the market for these companies. Upto now, Software is the only area where India has been able to become the market for the world successfully. However, another area where India is uniquely positioned and like software can become significant for the world is Edtech. India has one of the largest English speaking population who are well educated and can work at a fraction of the cost of the global economies. We are seeing some of the companies like Byju’s trying to create global scale in this business.
Other areas where we can see digital companies growing could be gaming (Nazaara is already listed), Ticketing etc.
Hence, it is quite clear that the opportunities are humongous and with internet penetration increasing and CoVID helping the transition to the digital world, next 10 years may be of these companies which are trying to digitise businesses and customer experience. The size is already visible in the global economies with few trillion dollar companies in the US. The largest delivery company being around $200bn in China.
But making money may not be very simple
However, despite the potential there are multiple peculiarities in this space
- Most of the companies are currently loss making in this space, current valuations of a lot of these companies assume that expenses are for future growth and margins are already visible. Once, they reach critical mass the profitability can start and can grow disproportionally. Also, most of these are trying to create ecosystem where they can straddle between various types of businesses i.e. Paytm is large payment company, however it has multiple other categories like ecommerce etc. Amazon is into multiple lines of businesses ranging from e-retailer to payments to music to content etc. Hence, the size of these companies can be multi fold of single line businesses.
- Its’ very difficult to value these companies currently given really fast growth rate and losses and hence the stocks prices can be very volatile. Despite the fact that post the fall of 2000 we saw some real internet giants evolving in the US and software companies creating great scale in India, Nasdaq took more than a decade to recoup losses of 1999-2001 with multiple mortalities. Similarly in India a lot of Indian software companies saw negative share price returns for multiple years. Hence, fast growth brings a problem of overvaluation and losses of mortality.
- Also, given a lot of these businesses have the characteristics of winner takes all, if one is not invested in the right company then the chances of losses expand further. There is only google, one Microsoft, one Amazon and one Facebook. However, there have been multiple failures and there are many who are trying, hence the market remains in continuous disruption mode before the winner emerges
Overall, I believe that digital is the future and India is bound to see some behemoths emerging, but it may not be the best strategy for the retail investors to participate directly unless they have some big insights and very long duration.
Disclaimer: This has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained herein is for general purposes only and not a complete disclosure of every material fact. The Stocks mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data are as on date. The content does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. Investors are requested to note that as a manager to the products of various business segments offered by Motilal Oswal Asset Management Company (MOAMC) or its associates has financial interest in the stocks mentioned herein. MOAMC or its associates did not receive any compensation from or other benefits from the subject company/ies whose stocks are mentioned herein or from a third party in connection with the same. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.